CURRENT VACANCIES

Are you looking for...

Related Search

Success of income investing lies in long-term sustainability

How can investors maximise their returns in the long-term? Kin Weng Pang, Schroders Multi-Asset Fund Manager, says ignore the headlines and focus on income and a diversified approach to achieve sustainable long-term results.

15 May 2015

Kin Weng Pang

Multi-Asset Fund Manager

Can income investing survive in a low yield environment?

In a world where interest rates in developed economies are at rock bottom and a rate rise in the US is just around the corner, there has been a flurry of commentary about how investing for income is not suited to the times.

But this parochial thinking ignores one major factor; the long-term sustainable and consistent income, as well as capital growth, that this style of investing can deliver.

Can a multi-asset income approach help?

No doubt generating income when yields are at historic lows is no longer as simple as investors believed it once was.

However, it’s important to look past the short-termism of what investment style is in vogue and seek out the longer-term benefits of any approach.

In this sense, the multi-asset income approach to investing takes advantage of a number of trends that have transpired over the past decades.

For a more well-rounded perspective on why this is, look no further than the 3Ds; Demographics, Deleveraging and Decelerating growth.

Changing demographics driving demand for the 'silver dollar'

Firstly, the world’s demographic data are forcing investors to study the viability of income investing.

In 2000, the world had around 600 million people aged 60 or over. However, as longevity increases and former large and youthful populations start greying (think China) this number is set to surge to nearly 2 billion by the year 2050.

As working age populations dwindle, people retire and life expectancy increases, the demand for consistent and sustainable income solutions will rise.

This trend is already evident in companies’ tailoring of services to the ‘silver dollar’ and the investment industry is no exception.

Deleveraging damaging long-term growth prospects

Secondly, although consumers in developed economies are deleveraging and paying down debt, the reality for governments is an entirely different matter.

Private debt has effectively been transferred to the public sector as developed world economies have taken on a staggering amount of debt. This is highlighted by the example of the US, where total (corporate + government) debt as a percentage of GDP has hit 350%.

Collectively, this suggests global deleveraging is going to play out over the longer-term and, as a result, growth is going to remain laboured.

This in turn will mean terminal interest rates (a measure of long-term rates) are likely to be below historical aggregates. Furthermore, the number of high-yielding safe government bonds is in short supply.

Decelerating growth shines spotlight on income

Thirdly, decelerating global economic growth is going to make earning a decent return from capital gains in an investment portfolio all that much harder, as well as less predictable.

And in the current deflationary environment, where real interest rates have dipped into negative territory, income will continue to remain an important source of returns for investors.

These three important trends will sustain and grow demand for income investments over the long term.

More crucially, these 3Ds are structural shifts that will endure and will therefore require long-term planning in both sustaining income as well as growing capital in investors’ portfolios.

So how best can investors maximise their income while minimising risk?

In 2007, holding cash that would yield 5% would have been good enough.

A typical approach nowadays here in Asia is to focus on a split between Asian high-yield bonds and Asian dividend stocks. However, the yield on offer is not commensurate with the volatility that has been present.

With a multi-asset approach, a similar yield is achieved with just under half the level of volatility.

The two aforementioned asset classes, along with Japan REITs, global equities and fixed income, and emerging market debt (EMD) mean that the wider diversification offers investors the opportunity to avoid the yield traps present in fixed income and equities.

It also demonstrates the benefits of the need to be unconstrained in your investment approach and how imperative it is to focus on higher quality securities that will grow and sustain income returns.

Although the phrase ‘currency wars’ may be hyperbole at this point, there is no denying that currency fluctuations have eroded many markets’ headline returns (with foreign investors in Japan suffering on the yen’s weakness).

In contrast, a multi-asset approach to investing allows for active asset allocation that manages risks in all the different asset classes, where active currency management can also be utilised to maximise returns for a sterling-based investor.

How will multi-asset fare when rates rise?

Although the merits of a multi-asset approach to income investing are clear over the longer-term, how will this style of investing fare in an environment where the Federal Reserve (Fed) is likely to raise rates in the current year and beyond?

The key factor we look at, as multi-asset income investors, is how fast the Fed will raise rates. And the current fragility of a full-blown recovery in the US economy suggests that rate rises, when they do occur, will be implemented gradually.

History suggests that high dividend stocks and high-yield bonds actually delivered solid performance in the last tightening cycle by the Fed in 2004-2007.

Bonds may be hit the hardest by a rate rise but this should be offset somewhat by a likely cap on yields, which will still allow for opportunities to arise.

Income is still the outcome

However, the larger picture still supports the case for income.

Although the world is focused on the tightening timetable in the US, the rest of the world is easing policy. This is true of both Europe and Japan but also Asia, where central banks from India to Korea are cutting interest rates.

In a low growth and low interest rate world, where the appetite for income is only growing, sustainable income investing, and the flexibility that accompanies it, will ensure it remains an important source of returns for years to come.

Topics:

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.
To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal.

To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada.